Should I Buy a House?

Reasons to Buy a House

Now may be an ideal time to buy a home if:

1. You Have a Down Payment Saved

The general rule is to make a down payment of 20% of the home's purchase price, but that isn't always necessary. You can find loan programs that require down payments of 10%, 3% or even no down payment at all.

However, there are advantages to making a 20% down payment. Many lenders charge private mortgage insurance (PMI) if your down payment is less than 20%; this can cost 0.5% to 2% of the total loan amount each year. In addition, a higher down payment generally qualifies you for a lower mortgage interest rate and lowers your monthly mortgage payment.

Learn more: How Much Should I Save for a Down Payment?

2. Your Credit Is Strong

Depending on the lender and the type of mortgage you're applying for, the minimum credit score needed to buy a house may range from 500 to 700. However, you generally need a credit score of at least 620 for a conventional mortgage. Credit scores in the good or exceptional range can give you more loan options to choose from and help you qualify for lower interest rates, which can save you tens of thousands of dollars over your loan term.

Learn more:What Credit Score Do I Need to Buy a House?

3. Your Debt Is Under Control

In addition to considering your credit score and down payment, mortgage lenders assess your debt-to-income ratio (DTI) when determining whether to approve your loan and how much you can borrow. Your DTI measures how much of your gross monthly income goes toward debt payments each month. To calculate your DTI, divide your total monthly debt payments by your gross income. Mortgage lenders usually look for a DTI under 43%; some require a DTI of 36% or less. If your DTI is too high, lenders may be concerned about your ability to afford a new loan.

Learn more: How to Reduce DTI Before Applying for a Loan

4. You've Considered Closing Costs and Other Expenses

A monthly mortgage payment isn't the only expense to consider when you buy a home. You'll also pay closing costs, which are typically 2% to 5% of the home's purchase price. Then there are moving costs to consider, plus the cost of new furniture or appliances, and new paint, flooring or other quick fixes to get the home move-in ready.

Once the home is yours, you'll be responsible for homeowners insurance, property taxes, home maintenance and repairs, and possibly mortgage insurance. Before buying a home, be confident your budget can easily absorb the cost of homeownership going forward.

Tip: Mortgage lenders' general rule is that your total monthly housing costs—including principal, interest, taxes and insurance—shouldn't exceed 28% of your gross monthly income.

5. You're Ready to Invest in Your Future

When you pay rent, the money is gone; but as you pay down a mortgage, you build equity that you can tap while you're still in your home or recoup when you sell it. Home values generally rise over time, making homeownership a path to building wealth for many people. If the cost of housing in your area is projected to rise, purchasing a home with a fixed-rate mortgage can protect you from rising rents by locking in predictable housing payments.

Tip: Rent payments may help improve your credit score if you use a private rent reporting service. You can also sign up for Experian Boost^®ø to have timely rent payments added to your Experian credit file.

6. There's Enough Home Inventory Where You Want to Buy

When there are lots of homes available for sale and home prices are stable or dropping, it's considered a buyer's market. Homes take longer to sell in a buyer's market, so you'll have more time to compare properties and weigh your decision. You're also more likely to have the upper hand in negotiating prices or requesting concessions. For example, a buyer may agree to cover part of your closing costs, pay for necessary repairs or throw furniture and appliances into the deal.

Learn more: How to Reduce Closing Costs

Reasons Not to Buy a House

This may not be a good time to buy a house if:

1. Your Income Isn't Stable

Mortgage lenders look for a steady income when considering your loan application. Although being self-employed or a freelancer won't necessarily disqualify you from getting a mortgage, an irregular income could make it more difficult. You might also pay higher interest rates. In this case, it may be a good idea to hold off on buying a house until your income stabilizes. You might also want to delay a home purchase if you're worried about layoffs at work.

Learn more: What Happens if You Lose Your Job Before Closing on a Mortgage?

2. You're Already Strapped for Cash

Renting is usually more affordable than buying a home, at least in the short term. If you're struggling to afford your current bills, buying a home is likely to make your financial situation worse. If you can't pay your mortgage, you could face foreclosure, doing serious damage to your credit score. Work on sticking to a budget, reducing your expenses and increasing your income before you start shopping for a house.

Tip: Stretching your budget to the limits to buy a home could leave you house poor. That's when so much of your income goes to housing that there's little left over.

3. You Don't Have an Emergency Fund

A solid emergency fund provides a financial safety net, helping you cover unexpected expenses without going into debt. As a homeowner, an emergency fund can be a lifesaver when your dishwasher breaks down or your roof needs fixing. It's generally recommended to have an emergency fund to cover three to six months' worth of your essential monthly expenses. If that sounds unrealistic, set an initial goal to save $500 to $1,000 and go from there.

Tip: Set up automatic transfers to your emergency fund each payday and consider putting the money in a high-yield savings account so it earns more interest.

4. You Have a Lot of Debt

You don't need to be completely debt-free to buy a home, but if you're already burdened with . hefty monthly debt payments, you'll have less money available for mortgage payments. A DTI that's too high for mortgage lenders' comfort could make it difficult to get approved for a loan. Paying down high-interest credit card debt can reduce your DTI and your credit utilization ratio, which could boost your credit score.

5. There's Limited Inventory Where You Want to Buy

When available homes are scarce and sell quickly, it's known as a seller's market. You have few options and might end up settling for a house you later regret buying. There will also be stiff competition from buyers who can bid over asking price or make all-cash offers. You might be tempted to skip the home inspection or bid more than you can comfortably afford to beat other buyers. If you buy at the top of the market and your home value drops, you could end up with negative equity.

Learn more: How to Prepare to Buy a House in Five Years

How to Save for a House

Follow these steps to save money for a house.

• Decide how much to save. Research home prices and mortgage options, including first-time homebuyer programs and down payment assistance programs, to figure out how much you'll need to save for a down payment.
• Set a goal. Working backwards from when you want to buy a home, set a reasonable savings goal. For example, if you want to buy a house in three years and need a $90,000 down payment, you'd need to save $30,000 a year, or $2,500 a month.
• Make a budget. Go over your income and monthly expenses to create a budget. Meeting your down payment goals may require cutting some expenses or looking for ways to bring in more money.
• Select a savings account. A money market account or high-yield savings account can help your money grow faster; they generally have higher interest rates than standard savings accounts. Use a savings calculator to see how much you can earn.
• Automate your savings. Setting up automatic transfers or direct deposit into your savings account each payday can help keep your savings plan on track.

Frequently Asked Questions

Get Your Credit Ready Before You Buy a House

When you decide to take the plunge and buy a house, start by checking your credit report and credit scores. If necessary, take steps to improve your credit before applying for a mortgage to increase your odds of approval and help make your home loan more affordable. It's also a good idea to get preapproved for a mortgage before you start house shopping; preapproval can make you a more competitive buyer.

As you shop for a home, keep an eye on your credit. Consider signing up for free credit monitoring from Experian to get access to your FICO^® Score^Θ and alerts of important changes to your accounts.